UK watchdog closes Lehman case against auditor E&Y

LONDON Jan 29 (Reuters) - Britain's accounting watchdog
said it won't take any action against Ernst & Young (E&Y)
over the way it checked the books of Lehman Brothers,
the U.S. bank whose failure triggered a near meltdown in global
markets in 2008.

The Financial Reporting Council (FRC) probe focused on how
E&Y, one of the world's "Big Four" accounting firms, audited the
London-based European arm of Lehman.

"Following the conclusion of the investigation, the FRC's
executive counsel, Gareth Rees, has decided that no action
should be taken against E&Y or any individuals in connection
with their conduct in this matter," the FRC said in a statement.

E&Y had no immediate comment.

Lehman's collapse, along with bank rescues by taxpayers
across Europe and in the United States, prompted policymakers to
question why lenders had been given clean bills of health by
their auditors in the run up to the 2007-09 financial crisis.

The FRC's decision not to take action against E&Y was agreed
despite its finding that administrators had identified a
"significant shortfall in the pool of money held on trust for
clients" after Lehman failed in September 2008.

UK rules in force at the time of the Lehman collapse already
required banks to segregate funds that could be handed back to
customers in the event of their failure and the watchdog said
E&Y had signed off to the effect that Lehman had complied with
these rules.

The FRC called in an expert to consider the case but
concluded there was no realistic prospect of proving a case in
front of a tribunal and therefore decided to end the matter.

Last June the FRC closed a separate probe into how E&Y
endorsed financial statements from Lehman that used special
mechanisms - known as Repo 105 and Repo 108 transactions -
channelled through the bank's London unit to make its balance
sheet look temporarily smaller and therefore less risky.

A report for a U.S. Bankruptcy Court had described the
transactions as accounting "gimmicks" and had criticised E&Y for
failing to challenge their use.

The European Union is in the process of approving a law
requiring auditors to improve the quality of their work and be
more sceptical of what management at clients, including banks,
tell them.